Cenvat credit on canteen service tax denied, but bona fide belief barred extended limitation and penalty.

Cenvat credit was held inadmissible on service tax paid on amounts recovered from employees for canteen services, though tax paid on any eligible service component could still be available in accordance with law. On limitation and penalty, the prevailing larger bench view during the relevant period supported availment of credit, so the assessee's bona fide belief negated suppression and wilful intent. The extended period of limitation was therefore not sustainable, and penalty was set aside, while the demand within normal limitation with interest was maintained.

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Issues: (i) whether Cenvat credit was admissible on service tax paid on the amount recovered from employees for canteen services; (ii) whether the demand could be sustained by invoking the extended period of limitation and whether penalty was warranted.

Issue (i): whether Cenvat credit was admissible on service tax paid on the amount recovered from employees for canteen services.

Analysis: The admissibility of credit on the service tax component relating to canteen services was already settled against the assessee. The relevant principle was that credit could not be taken on the amount recovered from employees towards such service, though the tax paid on the eligible service component could be available in accordance with law.

Conclusion: The issue was decided against the assessee.

Issue (ii): whether the demand could be sustained by invoking the extended period of limitation and whether penalty was warranted.

Analysis: For the relevant period, the larger bench view supporting availment of credit was holding the field, and the subsequent contrary clarification came later. On that basis, the assessee had a bona fide belief regarding eligibility, so suppression or wilful intent was not established for invoking the extended period. The same bona fide circumstances also negated the basis for penalty.

Conclusion: Invocation of the extended period was not sustainable and the penalty was set aside, while the demand within normal limitation with interest was sustained.

Final Conclusion: The appeal succeeded only to the extent of limitation and penalty, but the substantive disallowance on merits remained intact for the admissible part of the demand within limitation.

Ratio Decidendi: When the assessee acts under a bona fide belief supported by the prevailing legal position during the relevant period, extended limitation and penalty cannot be invoked absent suppression or wilful intent, even if the credit claim fails on merits.

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